How do large companies buy infrastructure (e.g. electricity, gas or rail)? Mainstream economics literature proposes that in the absence of an intermediating government, the bargaining power of large customers in procuring infrastructure will be weak. Drawing on a spatial, temporal and relational framework, this article critiques this proposition through a case study of a large manufacturing firm, ThyssenKrupp (TK) AG, which recently invested €7 billion in steel processing facilities in Brazil and USA. I find that prior to making durable and immobile investments large firms—like TK—can exert symmetric bargaining power against sellers of infrastructure, provided the firm has competitive alternatives available in making a location decision. TK exerted strong bargaining power by doing extensive analysis; keeping its commitment to any given location alternative low; inducing a ‘relational auction’ among alternatives it found desirable and by demanding tailored infrastructure services, rather than off-the-shelf commodities. Public sector infrastructure megaprojects, built without active co-development with lead users, are likely to be wasteful investments.

B

Becker, Johannes and Fuest, Clemens
(2010)
EU regional policy and tax competition.
European Economic Review, 54 (1).
pp. 150-161.
(Cited 0 times in Web of Science.)
Link to full text available through this repository.

Abstract

The European Union (EU) provides coordination and financing of trans-European transport infrastructures, i.e. roads and railways, which link the EU member states and reduce the cost of transport and mobility. This raises the question of whether EU involvement in this area is justified by inefficiencies of national infrastructure policies. Moreover, an often expressed concern is that policies enhancing mobility may boost tax competition. We analyze these questions using a model where countries compete for the location of profitable firms. We show that a coordination of investment in transport cost reducing infrastructures within union countries enhances welfare and mitigates tax competition. In contrast, with regard to union-periphery infrastructure, the union has an interest in a coordinated reduction of investment expenditures. Here, the effects on tax competition are ambiguous. Our results provide a rationale for EU-level regional policy that supports the development of intra-union infrastructure.

The article first describes characteristics of major infrastructure projects. Second, it documents a much neglected topic in economics: that ex ante estimates of costs and benefits are often very different from actual ex post costs and benefits. For large infrastructure projects the consequences are cost overruns, benefit shortfalls, and the systematic underestimation of risks. Third, implications for cost–benefit analysis are described, including that such analysis is not to be trusted for major infrastructure projects. Fourth, the article uncovers the causes of this state of affairs in terms of perverse incentives that encourage promoters to underestimate costs and overestimate benefits in the business cases for their projects. But the projects that are made to look best on paper are the projects that amass the highest cost overruns and benefit shortfalls in reality. The article depicts this situation as ‘survival of the unfittest’. Fifth, the article sets out to explain how the problem may be solved, with a view to arriving at more efficient and more democratic projects, and avoiding the scandals that often accompany major infrastructure investments. Finally, the article identifies current trends in major infrastructure development. It is argued that a rapid increase in stimulus spending, combined with more investments in emerging economies, combined with more spending on information technology is catapulting infrastructure investment from the frying pan into the fire.